2023-07-14 10:31:25
The positive news first: Inflation of over 11 percent at the beginning of the year and 8 percent in the middle of the year will continue to decline – and significantly so, according to the current economic indicator from UniCredit Bank Austria. However, a slight downturn in the economy is to be expected for the time being – and the prospects of an economic improvement have been postponed. On the other hand, things might be better economically in 2024 than previously forecast.
“Overall inflation in Austria is likely to weaken to around 4 percent at the end of the year with the accelerated decline in the second half of the year,” expects UniCredit Bank Austria economist Walter Pudschedl.
“In 2023 as a whole, following more than 9.5 percent in the first half of the year, average inflation is expected to be 7.6 percent, the highest value since 1975,” added the economist. Although the dampening effect of fuel is abating, the lower wholesale prices for electricity and gas are being passed on to consumers – albeit hesitantly – as the bank announced on Friday. But lower food and industrial goods prices should also weigh on inflation. In the case of services, on the other hand, a slower price decline is to be expected in view of rising wage costs and good demand. For 2024, the bank’s economists expect average inflation of 3.5 percent.
However, it is less pleasing that the “UniCredit Bank Austria Business Indicator” fell to minus 2.9 points in June, following minus 2.4 in the month before. In the past few months, the service sector has proven to be strong, meanwhile the recession in industry and construction is increasingly affecting the service sector, according to UniCredit Bank Austria chief economist Stefan Bruckbauer. After a slight increase in gross domestic product (GDP) in the first quarter of 2023, a slight minus in the second quarter can be expected.
The Bank therefore also justified the drop in the economic indicator with the noticeably poorer mood in the service sector – above all in business-related services, while consumer-related services in the leisure and tourism sectors are still benefiting from the need to catch up.
But lower industrial demand from abroad also weighed on the economic mood. The rate hikes by the (European Central Bank) ECB made residential real estate more expensive, which in turn weighed on construction. Nevertheless, an economic slump is not to be expected, but rather a slowdown. For this year, the economists at Bank Austria expect economic growth of 0.7 percent. “In return, our GDP forecast of 1.2 percent for 2024 might prove to be too cautious,” said Pudschedl.
According to the economic report, the weaker economy in recent months is already reflected in the labor market figures for the manufacturing sector. However, the need for workers in the service sector is unbroken. The unemployment rate will rise to an average of 6.4 percent this year and fall to 6.3 percent next year, according to economists’ forecasts.
Bruckbauer said further increases in key interest rates are to be expected at the end of July and probably also in September. “In our estimation, interest rate cuts will not be on the ECB’s agenda until mid-2024 at the earliest,” the chief economist noted.
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